Are fund flows related to return performance? You’d think so and here is some data. The analysis explains the net flows into funds in calendar quarter t (the dependent variable in the regression) by the return performance in the prior quarter t-1. The two prior performance measures are the fund’s alpha (its return over those for risk measures) and its return relative to the market (ETF Market Excess Return) with controls for the level of flows for prior quarters. The three asterisks indicate that the t-statistic is statistically significant at the 1% probability level.
The point: Higher fund performance begets more flows into a fund. But are one period returns a good indicator of future returns?
| Dependent Variable | ETF Returnt |
| ETF Alpha | 0.794*** |
| (5.15) | |
| ETF Market Excess Return | 0.160*** |
| (5.17) | |
| ETF Flow | 0.163*** |
| (13.89) | |
| ETF Flowi,t-1 | 0.080*** |
| (8.72) | |
| ETF Flowi,t-2 | 0.051*** |
| (6.04) | |
| ETF Flowi,t-3 | 0.027*** |
| (3.92) | |
| Observations | 23,039 |
| R-squared | 0.098 |
Source: Zoe, Y. Lost in the Rising Tide: ETF Flows and Valuation. PhD dissertation, Columbia University, 2019.